The Recession Hangover | Its Origins and Its Potential

It has been called a Recession Hangover, an Emotional Recession, Stagflation, and even worse, an Invisible Depression, all descriptions of the now sluggish U.S. economy, and an apt descriptor of the recession of the global economy as well.

The Recession Hangover is a well-coined phrase for those who know what a hangover feels like: sluggish, headache-y, hard to get rid of, unable to move as quickly as one wants, due mainly to high-life partying the night before, or in this metaphorical case, living the high life between 2002-2008.

Last month, the Federal Reserve Board released results from the latest Survey Of Consumer Finances (SCF), a triennial government survey that remains a definitive source of information about the financial conduct of the American family. It took two years to autoclave all the numbers, but at the end of it, the survey depicts the ebb and flow of fiscal acquisition and loss in the first ten years of our new millennium: 2000-2010. Though this survey ended in 2010, it is only now that the logical results are being extrapolated and interpreted.

One exceptional interpretation of this complex, 80-page statistical survey has been written by Stephen Kraus, Ph.D., Chief Insights Officer, Audience Measurement Group, Ipsos MediaCT, a dimension of the well-respected market research firm, Ipsos Mendelsohn. His evaluation provides an original, substantive root system appraisal for the Recession Hangover.

“This survey,” says Dr. Kraus, “tells a tale of three distinct periods in the decade, and how the events and expectations of each period continue to reverberate in the mindsets and marketplace approaches of consumers today.” The first is in 2001-2004, what Dr. Kraus calls 'The Valley Between The Bubbles,' the time after the dot-com bubble burst, and right before the U.S. entered a time of financial stability and optimism.

“In a sense,” said Dr. Kraus, “Americans learned that bubbles would come, generate tremendous wealth for a few, and then burst softly, with modest fallout. The lesson was not so much to avoid bubbles, but rather to resolve oneself to catch the wave of the next one. Americans left the 2001-2004 period mentally primed to throw themselves into another thrilling and dream-inspiring bubble.”

Then, according to Dr. Kraus, the time between 2004-2007 is called 'The Rising Tide of Expectations,' a time of optimism and easy spending. Mean and median net worth rose substantially from 2004-2007, as the rising tide of the housing bubble lifted expectations of success into the realm, not only of hope, but of inevitability.

Dr. Kraus, writes, “Wealth was coming from home ownership and real estate investment. It was attainable. Americans began to spend, not based on their actual wealth, but on their felt and anticipated wealth. Many luxury providers rushed to offer lower-priced and more-accessible credit line extensions, as the “aspirational luxury consumer” seemed the future of the industry.” But then...

The third period came, from 2007-2010: 'The Great Recession,' what goes up, must come down. The lesson of gravity turned into the profound lesson of gravitas: unemployment nearly doubled, home values dropped roughly 25% nationally and the stock market lost half its value. And it all happened suddenly.

As Dr. Kraus comments, “The Survey Of Consumer Finances shows how dramatically key financial metrics faltered from 2007-2010. Median income fell by 7.7%; mean income by 11.1%. Net worth fell more dramatically, hammered by the troubled housing market. Median net worth 38.8%, reflecting a large and widespread fall. Mean net worth fell more modestly, by only 14.7%, as this metric was buoyed by the few at the higher-end with more of their net worth in investments (indeed, as 2010 ended, the stock market had already regained much of its Great Recession losses).

“Even more telling than the financial numbers is the psychological fall-out. Fear was palpable and unprecedented. Aspirational luxury shoppers essentially went extinct. Consumers took several steps down the hierarchy of needs, back to a basic and primal focus on security, and often in a literal sense, survival.”

The decade ends, and here we are from 2010 -2012, a time Dr. Kraus defines as lowered expectations amid heightened possibilities. The survey just cited, ended in 2010, and even though it took two years to analyze the numbers, general patterns have emerged: the housing market is recovering slowly but surely. The stock market has rebounded with a little more alacrity, and withal, the Hangover still with us.

Dr. Kraus says, “Psychologically, the palpable fear of 2008 has given way to a more-persistent if less-acute lingering anxiety. Our monthly Mendelsohn Affluent Barometer surveys show that optimism and spending continue to be restrained even among many affluent Americans, although some luxury markets have seen a mini-rebound as the stock market has helped those at the highest end.”

It can be argued, also, that even those at the highest end, those usually untouched by any economic downturn, have also been affected, and have reacted with understandable, yet unique restraint. Dr. Jim Taylor, Senior Vice President of the Harrison Group, and co-author of the 2012 Survey Of Affluence And Wealth In America, also mentioned this issue in a recent AMEX Publishing Luxury Summit Presentation: “...even though things seem OK, our affluent respondents still believe they can lose everything, and consequently have a due regard for risk.”

Dr. Taylor brings up an interesting point: the regard for, and the awareness of, risk. Earlier in the prior decade, risk tolerance appeared to have been one of the primum mobiles of investing and buying, and those who were risk averse did not play the game. Now, with a possible global recession and an apparent static state economy here at home, risk tolerance seems to be more deeply tempered by its opposite, risk aversion. This mindset bifurcation may indeed play a role in what Dr. Kraus calls ‘(spending) restraint’, thus bringing on what Dr. Taylor has called our ‘static state’ economy.

Ultimately, there are many who still believe that the good times will roll again: the Millennials are coming on strong, with their unique mix of luxury demand and casual lifestyle; new definitions are also emerging, relating luxury brand to personal, rather than collective, experience, through ubiquitous digital and augmented reality strategies. But it will be awhile before the Jeroboam of pre-2004 Champagne good times will decant and flow again.

After all, many, it seems, are still in the dark Hangover mode, seeing uncertainty and diminished expectations as more the rule than the exception. And yet, as they great American poet Theodore Roethke wrote, “In a dark time, the eye begins to see.” It remains to be seen what will be seen, and more importantly, done.

The Federal Reserve Board's detailed report on the 2010 Survey of Consumer Finances can be found here: FederalReserve.gov

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